Construction & Engineering

A challenging year for the sector saw an increase in DWC, driven by a lengthening of the billings and collections cycle.

The construction industry experienced growth in FY22, with 75% of our sample recording an increase in revenue. However, this only translated to higher margins for 58% of our sample as higher input costs, COVID-related disruptions, supply chain constraints, and extreme weather events impacted profitability.

Whilst COVID lockdowns saw the PCI* contract in July to September 2021, conditions improved, and activity remained high until April 2022 with strong demand fuelled by the Homebuilder stimulus, government infrastructure spend, and an increase in insurance and repair work following extreme weather events. As the year progressed, the impact of global supply chain issues and rising raw materials prices exacerbated local constraints on materials and labour and started to impact activity, with the PCI falling in May and June 2022.

From a working capital perspective, DWC increased 6.3 days to 47.9 days, which resulted in an additional $649 million in cash being “locked up” within our sampled companies.

This was driven by an increase in DSO of 8.3 days, with 75% of our sampled companies experiencing higher DSO, in part due to weather and supply chain delays that made it difficult to progress / complete work and convert that work into cash.

To help counter the increase in DSO, our sampled companies paid their suppliers more slowly, with 67% showing an increase in DPO and average DPO across the sample increasing by 1.9 days. The impact of COVID lockdowns and cash flow constraints is particularly noticeable in the H1 metrics, with average DSO and DPO increasing by over a week during this period before falling in H2. DIO remained relatively stable in what is typically an inventory-light sector.

Despite the small increase in average DPO, the sector is characterised by a supplier payment cycle that is materially shorter than the client collection cycle (a structural “funding gap”). In 2022, 58% of operators exhibited a structural “funding gap”, and all but two of these operators experienced an increase in the size of the gap. In a sector already managing supply chain and working capital constraints, this puts added pressure on cash flow.

Internationally, the US and EU markets also saw an increase in DWC, however we note that the Australian sample maintained a shorter working capital cycle than the international sample. Looking forward, supply chain pressures may ease, however contractors will be trying to counteract the material margin compression and its impact on cash flow by negotiating on pricing and sharing risk with developers and other customers.

* Performance on Construction Index which measures activity in the Construction industry.

NET WORKING CAPITAL PERFORMANCE

*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).